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tax-me-senseless
Level 2

What is my IRA basis if I make a non-deductible Trad IRA contribution, and then convert 100% of it to a Roth IRA? I have done it this way year after year. Is it zero?

The only money I have remaining in my Trad IRA is that of rollovers from a 401 K plan. All that I contributed directly got converted.
2 Replies
DavidD66
Expert Alumni

What is my IRA basis if I make a non-deductible Trad IRA contribution, and then convert 100% of it to a Roth IRA? I have done it this way year after year. Is it zero?

It sounds like you've been doing backdoor Roth IRA transactions  A true backdoor Roth IRA is where a taxpayer doesn’t have an IRA and can’t contribute to a Roth IRA. In this case, the taxpayer makes a nondeductible contribution to a newly created IRA and then converts those funds into the Roth IRA.  In this case, 100% of the amount converted is after tax, and there is no tax on the conversion. 

 

However, if a taxpayer already has an IRA, funded in total or in part with previously deducted (e.g. 401(k) rollovers or deductible IRA contributions, then the taxpayer must determine what share of the amount being converted is taxable and how much is nontaxable. The nontaxable portion includes the current nondeductible contribution.  Next you must do the calculation of how much of the conversion is taxable.

 

For example, lets say you have $45,000 in an IRA that was rolled over from a 401(k), and then you make a $5,000 nondeductible contribution to the same IRA, which gives it a balance of $50,000. If you withdraw $5,000 from the IRA and rollsit into a Roth, $500 would be nontaxable ($5,000/$50,000) x $5,000 withdrawn as part of a conversion) but $4,500 would be taxable ($5,000-$500) at your marginal tax rate on that year’s return.  Your tax basis in the IRA would now be $500

 

It doesn’t matter if you have one or more IRAs when calculating the nontaxable amount from the withdrawal [(total nondeductible amount / total IRA value) x total amount withdrawn]; they are treated as a single IRA.  

 

So, if you have been doing Roth Conversions, have an existing IRA, then your basis in that IRA is no longer zero.  Moreover, you may have been underreporting your taxable income.

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fanfare
Level 15

What is my IRA basis if I make a non-deductible Trad IRA contribution, and then convert 100% of it to a Roth IRA? I have done it this way year after year. Is it zero?

if you convert, as you said, non-deductible contribution to a Roth, and your IRA(s) balance  afterwards is not zero, then Form 8606 is required to calculate the taxable amount and new basis.

The new basis will also be non-zero.

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